Business partner's personal debts on card may be grounds for suit
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Dear Your Business Credit,
Is it possible to sue an authorized user of a business credit card for its use in personal transactions? My former partner used our business American Express to pay for her wedding. Using the business card for her personal use was never discussed or agreed upon.
By the time I knew this was happening, there was already a $17,000 balance. She promised the balance would be paid in full by December 2015. (The charges began in June/July 2015). It is now June 2016 and the balance has been $9,000 for the last six months because she’s only making minimum payments. This month she was late in making a payment. I am concerned about my credit and not sure if I should just personally pay the debt off and sue her for collection. Please advise. – Natalie
This is a terrible breach of your trust, and I can understand why you are angry.
According to the terms of most credit card issuers, an authorized user is allowed to make charges on the card but is not responsible for the debt. That said, I ran your question past several attorneys. Sarah Poriss, a consumer protection attorney in Hartford, Connecticut, said you may have rights against the authorized user.
“If there was an agreement and it was breached, then the owner can sue under the agreement," Poriss said in an email. "But if there was no written or even verbal agreement between the two, then the owner may need to prove harm in order to bring suit for relief.”
What does proving harm mean? You’d have to show how you have been hurt by your partner’s unauthorized use of the card and failure to pay down the balance, Poriss explained. “In some states, you are required to prove your ‘ascertainable loss’ or other harm to have a claim,” she said. “I would argue that the business owner has suffered harm in the form of loss of access to business credit.” In other words, as long as the balance on your card is not paid down, your available credit will be limited. That assumes you personally guaranteed the card, which it appears likely you did.
Given that your credit score may be affected, you could also argue that you have suffered damage in this way. “Lack of creditworthiness has been found to be loss or harm,” Poriss said in her note.
I would suggest you talk with a lawyer about your situation, so you can determine if you could realistically make a strong case in court, based on the facts – and justify the legal expenses.
In the meantime, there’s the issue of your credit. If you are worried that your former partner will continue to pay late and hurt your credit, you may want to start making minimum payments every month. Leslie Tayne, an attorney in Melville, New York, who advises small-business owners on credit and bankruptcy, suggests signing up for automatic payments on the debt so you know that no payments are being missed. “Your credit will only be negatively impacted if a payment is 30 days past due,” she added.
Tayne suggested that you also try to speak with your former partner to arrange a formal, written agreement saying that she owes the money, will continue to pay it, will make her payments on time and will pay more than the minimum. “Let her know that in the end if she continues to pay the minimum that she will be paying more in interest and be responsible for paying off this additional accrued balance,” advised Tayne.
In addition, you may want to suspend her from using the card in the future, so she doesn’t make any further charges, Tayne suggested. Tayne also recommended claiming any of your rewards points now, before your partner makes any attempt to do so.
You may not have much desire to find another business partner after this horrible experience, but in case you end up doing that, make sure to create a written policy that governs the use of any business credit card you issue. If you both agree that the card may be used for personal reasons, Tayne says, the agreement should specify that all payments will be made on time. You could also set a very short time limit on how quickly they have be repaid in full. “You might also want to put a maximum on how much the person can use for personal expenses per year and have a term along with it,” she said.
We all want to feel that we can trust the people we work with, but in business, it’s always best to put agreements in writing to avoid misunderstandings. Good luck!
See related: Paying deceased’s bill doesn’t imply liability for authorized user, Business debt caused by partner’s con? You’re still on the hook, Remorseful fraudster must find way to repay business partner
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